Financial Accounting Reviewer - Chapter 65
Financial Accounting Reviewer - Chapter 65
Financial Accounting Reviewer - Chapter 65
GOODWILL
The carrying amount and fair value of the assets and liabilities of the acquiree were:
PAS 38, paragraph 107, provides that goodwill or an intangible in indefinite useful life shall not be
amortized but impairment annually and whenever there is an intangible asset may be impaired.
The carrying amount and fair value of the assets and liabilities of the acquiree were:
Carrying amount Fair value
Accounts receivable 1,800,000 2,000,000
Inventory 2,700,000 5,000,000
Property, plant and equipment 10,000,000 13,000,000
Accounts payable 3,000,000 3,000,000
Bonds payable 4,500,000 3,500,000
Mayer Company's assessment of the fair value it obtained when it purchased Tara Company is as
follows:
Cash 1,000,000
Inventory 500,000
In-process research and development 5,000,000
Assembled workforce 1,200,000
The goodwill includes the fair value of the assembled workforce of P1,200,000.
The fair value associated with the acquired entity's government contract is not based on any
legal or contractual relationship.
In addition, for obvious reason, there is no open market trading for an intangible of this sort.
The government contract is not recognized separately because it is not on any legal or
contractual relationship nor is it separately tradable.
The statement of financial position of the acquiree on the date of acquisition showed net assets
with a carrying amount of P6,000,000.
The fair value of property, plant, and equipment on the date of acquisition was P800,000 in
excess of carrying amount.
What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. 1,000,000
b. 3,300,000
c. 2,700,000
d. 3,000,000
On the date of acquisition, Sun's assets and liabilities had fair value different from the carrying
amount as follows:
What amount should be reported as goodwill in the consolidated statement of financial position
of Clever Company and its wholly-owned subsidiary?
a. 350,000
b. 250,000
c. 750,000
d. 800,000
Darwin manufactures and sells a cleaning cloth called the “Superswipe" which was developed by
Darwin's highly trained staff.
The unique nature of the coating used on the “Superswipe” has resulted in Darwin Company a
significant share of the South African market.
As a result of the takeover, Brisbane Company acquired the following assets at fair value:
In addition, Darwin Company owned, but had not recognized, the following:
The normal rate of return is 20%. The fair value of need asset of the entity currently year-end
P10,000,000.
5. Excess earnings are discounted at 12% for 5 years? (The PV of an ordinary annuity of 1 for 5
years at 12% is 3.60)
a. 12,960,000
b. 10,800,000
c. 5,760,000
d. 7,200,000
Solution 65-10
Question 1 Answer a
Cumulative earnings 16,500,000
Add back expropriation loss 1,500,000
Adjusted cumulative earnings 18,000,000
Question 2 Answer b
Excess earnings 1,600,000
Divide by capitalization rate 25%
Goodwill 6,400,000
Question 3 Answer a
Goodwill (3,600,000 x 3 years) 10,800,000
Question 4 Answer c
Average annual earnings 3,600,000
Divide by capitalization rate 25%
Net assets including goodwill 14,400,000
Net assets before goodwill 10,000,000
Goodwill 4,400,000
Question 5 Answer c
Excess earnings 1,600,000
Multiply by PV factor 3.60
Goodwill 5,760,000
Goodwill is measured by capitalizing excess earnings at 40% with normal return on average net
assets at 10%.
The acquisition cost or purchase price includes the payment for the 2018 net assets at fair value
and the goodwill.